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Treasury Secretary Henry Paulson is considering a new plan to reduce mortgage rates in another bid to revive the U.S. housing market according to an anonymous source. The Treasury could, under this new plan, step up purchases of mortgage backed securities (MBS) to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The possibility that this plan could change is enormous. We saw the results of the investment of $600 Billion into the MBS market last week, more investment could have more results.

Mortgage applications surged by a record last week and the average rate on a 30-year fixed-rate loan dropped to 5.47 percent, the lowest level since June 2005, the Mortgage Bankers Association said yesterday. So, what will this latest “news” do to the clients that have started application and (probably) locked their interest rate when they hear rates could drop another full percent?

Lowering mortgage rates to 4.5 percent might allow a lot of homeowners to refinance into a cheaper loan but some financial experts expect far fewer people will actually qualify for the lower rates. There are already a number of additions to rates due to credit score, loan to value and purpose of loan. With substantially lower rates, lender will probably tighten these requirements, even more.

I am not certain of what this announcement means to future business opportunities. One “expert” stated that he thought the lowering of the fixed rates to 4.5% could mean that 90% of the mortgages in existence could benefit from refinancing to the new, lower rate. If true, business could get quite brisk. Hopefully, government mortgage bonds (called Ginny Mae) would also benefit from this investment and we could see lower FHA rates also.

What are your feelings about having interest rates drop like this? Is it sustainable? Call me today to make an appointment so you are ready if this actually take place.